1
Back to the Future:
Oil and Natural Gas
Markets in Transition
(Again)
Center for the New Energy Economy
2015 Annual Natural Gas Conference
Fort Collins, Colorado
28 October 2015
Lori Smith Schell, Ph.D., ERP
Empowered Energy
(970) 247-8181
TM
U.S. Energy Mix Is a Large,
Slow-Moving Ship with Inertia
28 October 2015 www.EmpoweredEnergy.com 2
Source: EIA, 2015 Annual Energy Outlook, p. 15, http://www.eia.gov/forecasts/aeo/pdf/0383%282015%29.pdf.
25% Primary Energy Increase (vs. 39% Population Increase)
2
Oil Is an International Market;
Natural Gas Is More Regional
As a liquid, oil is readily transportable
Pipelines, waterborne tankers, trucks
As a gas, natural gas is mostly transported
regionally via land-based pipelines
Liquefied natural gas (“LNG”) enables marine
transport in international markets
Requires extensive, costly facilities on both ends,
for liquefaction (exporter) & regasification (importer)
Long-term contracts historically tied to oil prices
Spot market transactions becoming more prevalent 28 October 2015 www.EmpoweredEnergy.com 3
Oil is an
international
commodity,
with widely
heterogeneous
qualities (sulfur
content, weight,
product yield)
Natural gas is
homogeneous
and traded more
regionally, with
international LNG
trade increasing 28 October 2015 www.EmpoweredEnergy.com 4 Source: BP, June 2014, “BP Statistical Review of World Energy”, pp. 19 and 29.
= OPEC Members (~40% of Global Production)
3
28 October 2015 www.EmpoweredEnergy.com 5
GLOBAL DISTRIBUTION OF OIL AND
NATURAL GAS RESERVES (BY PERCENT)
OIL
NATURAL GAS
Venezuela 18%
Saudi Arabia 16%
United States 3%
Iran 34%
Russia 31%
United States 9%
U.S. Shale “Revolution” Is a
Fairly Recent Phenomenon
28 October 2015 www.EmpoweredEnergy.com 6 Source: EIA, May 14, 2015, Shale in the United States, http://www.eia.gov/energy_in_brief/article/shale_in_the_united_states.cfm
4
Can the U.S. Shale Experience
Be Replicated Elsewhere?
28 October 2015
Source: Oil & Gas Financial Journal, April 2015, Global Shale Lagging – Here’s Why, p. 41.
http://www.ogfj.com/articles/print/volume-12/issue-4/features/global-shale-lagging-here-s-why.html
www.EmpoweredEnergy.com 7
Extensive Natural Gas Pipeline
Network, Various Regulators
Interstate
Intrastate
Hinshaw
“LDC” = Local
Distribution
Company
“Muni” =
Municipality
(Self-Regulated) 28 October 2015 www.EmpoweredEnergy.com 8
5
Oil Pipelines More Limited
Since Other Transport Exists
28 October 2015 www.EmpoweredEnergy.com 9
“Crude by Rail” as New Fields
Developed Beyond Pipelines
28 October 2015 www.EmpoweredEnergy.com 10
Source: U.S. Department of Energy. Quadrennial Energy Report, April 2015, p. 5-4. http://energy.gov/epsa/downloads/quadrennial-energy-review-full-report
6
At Least Until Sufficient Pipeline
Infrastructure Is Developed
28 October 2015 www.EmpoweredEnergy.com 11
Source: Oil & Gas Financial Journal, March 2015, Will the Bakken Boom Go Bust?, p. 30.
http://www.ogfj.com/articles/print/volume-12/issue-3/features/will-the-bakken-boom-go-bust.html
Shale Oil & Gas Is Changing
Pipeline Flows & Pricing
28 October 2015 www.EmpoweredEnergy.com 12
Source: U.S. Department of Energy. Quadrennial Energy Report, April 2015, p. 4-5. http://energy.gov/epsa/downloads/quadrennial-energy-review-full-report
7
Natural Gas & Oil Prices – Both
Volatile, No Direct Linkage Now
28 October 2015 www.EmpoweredEnergy.com 13
Shale “Revolution” Impact
Low Rig Count?? We’ve Been
Here Before…
28 October 2015 www.EmpoweredEnergy.com 14
Source of Data: Baker Hughes, http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-reportsother
8
Natural Gas Production Levels
Slowing but Still Growing
28 October 2015 www.EmpoweredEnergy.com 15
Source: U.S. Energy Information Administration, Natural Gas Monthly, September 2015, p. 4.
July 2015
Current Oil Markets Driven By
Large Storage Overhang
28 October 2015 www.EmpoweredEnergy.com 16
9
U.S. Natural Gas Storage Also
Approaching Record Level
28 October 2015 www.EmpoweredEnergy.com 17
Rig Count Is Down But
Production Per Rig Is Up
28 October 2015 www.EmpoweredEnergy.com 18
Source: EIA, September 2015, Drilling Productivity Report, p. 2, http://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf
10
“Frack-log” of Drilled and
Uncompleted Wells Is Falling
28 October 2015 www.EmpoweredEnergy.com 19
Source: OGFJ, October 2015, North American Shale Update, p. 20. http://www.ogfj.com/articles/print/volume-12/issue-10/features/north-
american-shale-update.html
Amount of Economic Natural
Gas Declines as Prices Decline
28 October 2015 www.EmpoweredEnergy.com 20
Source: OGFJ, September 2015, Time to Tack Towards Gas, p. 48. http://www.ogfj.com/articles/print/volume-12/issue-
9/features/time-to-tack-towards-gas.html
11
Similarly as Oil Prices Decline…
28 October 2015 www.EmpoweredEnergy.com 21
Source: OGFJ, July 2015, Unconventional Resources, p. 17. http://www.ogfj.com/articles/print/volume-12/issue-
7/features/unconventional-resources.html
“Bucketed” Oil Prices Suggest
Current Prices Not Abnormal
28 October 2015 www.EmpoweredEnergy.com 22
Source: OGFJ, A Look at Key E&P Metrics, July 2015, p. 28. http://www.ogfj.com/articles/print/volume-12/issue-
7/features/a-look-at-key-e-p-metrics.html
12
Oil & Gas Employment Has
Declined with Low Prices…
28 October 2015 www.EmpoweredEnergy.com 23
Source: EIA, Today in Energy, June 23, 2015, http://www.eia.gov/todayinenergy/detail.cfm?id=21772
And Overleveraged Companies
May Fall to “Consolidation”
28 October 2015 www.EmpoweredEnergy.com 24 Source: OGFJ, September 2015, Time to Tack Towards Gas, p. 49.
http://www.ogfj.com/articles/print/volume-12/issue-9/features/time-to-tack-towards-gas.html
Source: OGFJ, June 2015, Capital Availability for
E&Ps, p. 38. http://www.ogfj.com/articles/print/volume-
12/issue-6/features/capital-availability-for-e-ps.html
13
Some Shale Gas is Rich in
Natural Gas Liquids (“NGLs”)
NGLs must be removed to meet interstate
pipeline specifications
Amount of NGLs removed depends in part on
relative prices of natural gas vs. NGLs
Ethane rejection has led to low ethane prices
in U.S. and increased global competitiveness
Return of ammonia, fertilizer, and methanol
production to U.S.
28 October 2015 www.EmpoweredEnergy.com 25
28 October 2015 26 www.EmpoweredEnergy.com
14
Chemical Feedstock Price
Drivers Differs by Continent
28 October 2015
Source: American Chemistry Council, March 2012, “Shale Gas and New Petrochemicals
Investment: Benefits for the Economy, Jobs, and US Manufacturing”, pp. 13-14f.
US: Ethane Price Tied to Natural Gas Europe: Ethane Price Tied to Naphtha
www.EmpoweredEnergy.com 27
Low Natural-Gas Tied Ethane
Prices Drive Investment
28 October 2015 www.EmpoweredEnergy.com 28
Source: Energy Information Administration, Today in Energy, January 29, 2015, “Growing U.S. HGL Production Spurs Petrochemical
Industry Investment”, http://www.eia.gov/todayinenergy/detail.cfm?id=19771
15
Increased U.S. Competitiveness
Elicits New Manufacturing
28 October 2015 www.EmpoweredEnergy.com 29
http://www.eia.gov/naturalgas/weekly/archive/2015/05_21/index.cfm
New Chemicals Manufacturing
Impact Is Reflected in CAB
28 October 2015 www.EmpoweredEnergy.com 30
16
U.S. Shale Gas “Revolution” –
The Demand Side
28 October 2015 www.EmpoweredEnergy.com 31
Source : U.S. Energy Information Administration, Today in Energy, September 11, 2015, Natural Gas Use Features Two
Seasonal Peaks Per Year. http://www.eia.gov/todayinenergy/detail.cfm?id=22892
Oil Remains Transportation
King Pin…But for How Long??
28 October 2015 www.EmpoweredEnergy.com 32
• Plug-In Electric Vehicles
• Hybrid Vehicles
• CNG/LNG Vehicles
• H2 Fuel Cell Vehicles
*
* OECD = Organisation for Economic Co-operation and Development
The competition is coming…..
17
Global Nat Gas Price Disparity:
OPPORTUNITY, but Whose?
28 October 2015
(September 2011)
?
?
?
www.EmpoweredEnergy.com 33
Source: BP, June 2015, “BP Statistical Review of World Energy”, p. 27.
Today’s Expectations: U.S. to
Become Net Overall Exporter *
28 October 2015
* Source: EIA, Annual
Energy Outlook 2015,
Reference Case;
Net Exporter by 2017.
Source: http://ferc.gov/industries/gas/indus-act/lng/LNG-proposed-potential.pdf
www.EmpoweredEnergy.com 34
18
Pre-Shale Gas “Revolution”
Anticipated More LNG Imports
28 October 2015
Disposition of U.S. Natural Gas Supply and Demand
40
50
60
70
80
90
100
110
120
130
140
Jan-0
1
Jan-0
3
Jan-0
5
Jan-0
7
Jan-0
9
Jan-1
1
Jan-1
3
Jan-1
5
Jan-1
7
Jan-1
9
Jan-2
1
Jan-2
3
Jan-2
5
Bcf/
day
40
50
60
70
80
90
100
110
120
130
140
Bc
f/d
ay
Lower-48 Production Net PL Imports LNG Imports Consumption
FORECAST
Data Source: EIA
2010: 4-5 New LNG Terminals
2020: Another 5-6 LNG Terminals
PRESENTATION MADE BY LORI SMITH SCHELL, Ph.D.,
TO THE 18TH WORLD PETROLEUM CONGRESS,
JOHANNESBURG, SOUTH AFRICA, SEPTEMBER 27, 2005
www.EmpoweredEnergy.com 35
U.S. LNG Exports Would Shift
Global LNG Flows and Markets
28 October 2015 www.EmpoweredEnergy.com 36
Source: BP, June 2014, “BP Statistical Review of World Energy”, p. 29.
19
Despite Shale Oil Boom, U.S.
Likely to Remain Net Importer
28 October 2015 www.EmpoweredEnergy.com 37
U.S. Crude Oil Export Ban?
Export Petroleum Products!
28 October 2015 www.EmpoweredEnergy.com 38
Source: U.S. Department of Energy. Quadrennial Energy Report, April 2015, p. 4-10.
http://energy.gov/epsa/downloads/quadrennial-energy-review-full-report
20
28 October 2015 www.EmpoweredEnergy.com 39
Renewables on the Rise, but…
Coal & Nat Gas Still Dominate
Source of Data: U.S. Energy Information Administration and New York Mercantile Exchange (NYMEX).
Renewables Are Impacting Both
Electric Grid Flows & Pricing…
28 October 2015 www.EmpoweredEnergy.com 40
California ISO’s “Duck Bill” Curve
Source: http://knowledgeproblem.com/2009/07/22/negative-
power-prices-in-ercot-west-charts-for-jan-june-2009/
21
With Increased Electrification
Seen as the Best Solution
28 October 2015 www.EmpoweredEnergy.com 41
Source: Form Eia-860 and Annual Energy Outlook 2014, http://www.eia.gov/todayinenergy/detail.cfm?id=17131
28 October 2015 www.EmpoweredEnergy.com 42
EPA Issued Final Clean Power
Plan (“CPP”) August 3, 2015
End: Cut power sector CO2 emissions 32%
by 2030 (2012 base) via state-specific targets
Rate-based: Reduce CO2/MWh generated
Mass-based: Reduce absolute quantity emitted
Means: “Building blocks” of (i) increased coal
plant efficiency, (i) swapping gas for coal, and
(iii) swapping renewables for fossil fuel
Final Rule: Increased reduction requirements
for states with coal-fired generation vs. draft.
22
28 October 2015 www.EmpoweredEnergy.com 43
Many Coal-Fired Generators
Closed Before the Final CPP
Source: U.S. Energy Information Administration, Form EIA-860, "Annual Electric Generator Report."
Note: Data for 2005 through 2011 represent actual retirements. Data for 2012 through 2016 represent planned retirements, as reported
to EIA. Data for 2011 through 2016 are early-release data and not fully vetted. Capacity values represent net summer capacity.
28 October 2015 www.EmpoweredEnergy.com 44
UCS’ Assessment of States’
Readiness for CPP Compliance
Source: Union of Concerned Scientists, August 13, 2015,
States of Progress Update: Existing Clean Energy
Commitments Put Most States in Strong Position to Meet
the EPA’s Final Clean Power Plan, pp. 12-13,
http://www.ucsusa.org/sites/default/files/attach/2015/08/St
ates-of-Progress-Update-Slidedeck.pdf
23
Climate Change ⎼ It’s Not Just
About the Carbon…
28 October 2015 www.EmpoweredEnergy.com 45
GHG = Greenhouse Gas
GWP = Global Warming Potential
GHG GWP (100 Yr)
Carbon Dioxide – CO2 1
Methane – CH4 21
Nitrous Oxide – N2O 310
SF6 – Sulfur Hexafluoride 23,900
Hydrofluorocarbons (13) – HFCs 140-11,700
Perfluorocarbons (6) – PFCs 6,500-9,200
CO2e = Carbon dioxide-equivalents
MT = metric tonne = 2,200 pounds
MMTCO2e = Million metric tonnes of CO2-equivalents (x 1000 = Giga tonnes)
“F-gases”
Natural Gas GHG Emissions
Half Those of Coal, But Still…
28 October 2015 www.EmpoweredEnergy.com 46
Source: U.S. Department of Energy. Quadrennial Energy Report, April 2015, p. 7-8. http://energy.gov/epsa/downloads/quadrennial-energy-review-full-report
24
Recent Discovery of Regional
Methane Cloud Is Troubling…
28 October 2015 www.EmpoweredEnergy.com 47
Source: NASA, October 9, 2014, U.S. Methane Hot Spot Bigger Than Expected,
http://science.nasa.gov/science-news/science-at-nasa/2014/09oct_methanehotspot/
Water Use for Fracking Tracks
Major Shale Field Development
28 October 2015 www.EmpoweredEnergy.com 48
25
Recent EPA Analysis of
Fracking Water Issues Found:
No systematic impacts to-date to drinking
water, but “potential vulnerabilities” do exist
Water withdrawals in low water availability areas
Fracking conducted directly into formations
containing drinking water resources
Inadequately cased or cemented wells resulting in
below-ground migration of gases and liquids
Inadequately treated wastewater discharged into
drinking water resources
Spills of hydraulic fluids and fracking wastewater,
including flowback and produced water.
28 October 2015 www.EmpoweredEnergy.com 49
Energy Prices Never Conform
to “Hockey Stick” Forecasts…
28 October 2015 www.EmpoweredEnergy.com 50
26
…In Either Nominal or Real
(Inflation-Adjusted) Dollars
28 October 2015 www.EmpoweredEnergy.com 51
Back to the Future: What
Comes Around Goes Around
What we do know volatility is here to stay
Prices go up and prices go down
Current prices are back to past price levels, though
geography and flows differ
What we don’t know with certainty: Timing
Advice in light of that uncertainty?
Consumers: Hedge your bets (lock in low prices)
Producers: Lock in market share efficiencies
Bottom Line: The more things change, the
more they stay the same. 28 October 2015 www.EmpoweredEnergy.com 52
27
28 October 2015 www.EmpoweredEnergy.com 53
Lori Smith Schell, Ph.D., ERP
Empowered Energy, Durango, CO 81303
+1 (970) 247-8181 [email protected]
Thank you!
Questions?
Source: U.S. Energy Information Administration,
http://www.eia.gov/totalenergy/data/monthly/pdf/flow/css_2013_energy.pdf.
Backup Slides
28 October 2015 www.EmpoweredEnergy.com 54
28
Water in the West – Huge Issue
in Hydraulic Fracturing of Shale
Major Issues:
1.2-3.5 million
gallons of
water per well
Fracking fluid
chemicals
Produced
water
disposal
Groundwater
issues?
28 October 2015 www.EmpoweredEnergy.com 55
Source: http://www.propublica.org/special/hydraulic-fracturing-national